U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20608 / June 3, 2008
Securities and Exchange Commission v. Michael J. McNaul, II, Dale C. Lucas, Gregg Krause, Lloyd F. Nunns, Russell W. Kilgariff, Steven L. Tallman, Freddie J. Hembree, Raymond L. Leonard, Jr., Mid Western Natural Gas, Inc., and Mark DuBoise, Defendants, and Alliance Leasing, LLC, Consolidated Management Group, LLC, Golden Belt Transportation, LLC, Garner Management, LLC, Forrest Energy, LLC, Warren Drilling, LLC, Warrick Drilling, LLC, Pawnee Iron Works, LLC, Mid-Kan Well Service, LLC, T&D Oilfield Services, LLC, and Consumer Information Network, Inc., Relief Defendants , Civil Action No. 08-1159-JTM-DWB (U.S.D.C./D. Kansas, Wichita Division)
SEC Sues 21 Individuals and Entities For Their Roles in a Massive Oil and Gas Offering Fraud
On May 28, 2008, the Securities and Exchange Commission (Commission) filed civil securities fraud charges against defendants Michael J. McNaul, II. (McNaul), Dale C. Lucas (Lucas), Gregg Krause (Krause), Lloyd F. Nunns (Nunns), Russell W. Kilgariff (Kilgariff), Steven L. Tallman (Tallman), Freddie J. Hembree (Hembree), Raymond L. Leonard, Jr. (Leonard), Mid Western Natural Gas, Inc. (Mid Western) and Mark DuBoise (DuBoise), and, as relief defendants, Alliance Leasing, LLC (Alliance), Consolidated Management Group, LLC (Consolidated), Golden Belt Transportation, LLC (Golden Belt), Garner Management, LLC (Garner), Forrest Energy, LLC (Forrest), Warren Drilling, LLC (Warren), Warrick Drilling, LLC (Warrick), Pawnee Iron Works, LLC (Pawnee), Mid-Kan Well Service, LLC (Mid-Kan), T&D Oilfield Services, LLC (T&D), and Consumer Information Network, Inc. (Consumer Information). The charges stem from an alleged massive securities offering fraud that has victimized over 1,300 investors from across the United States, as well as Canada and Puerto Rico.
The Commission's complaint, filed in U.S. District court in Wichita, Kansas, alleges that, between March 2004 and December 2007, the defendants raised approximately $156 million through the use of 22 purported oil-and-gas related equipment "joint ventures" structured to evade the securities laws. The defendants, according to the complaint, lured potential investors with, among other things, the false promise of annual returns of up to 40% from leasing and operating oil and gas equipment, and that the "joint ventures" would be rolled up into a single entity that would be the subject of an even more lucrative initial public offering (IPO) resulting in returns as high as 3-8 times their investment. However, the complaint alleges, the promised IPO and high annual returns have never come to fruition. On the contrary, the defendants have only returned approximately $7 million to investors over the four-year period of their fraudulent scheme, $1 million of which was diverted from other investors as Ponzi payments. Moreover, nearly half of the funds fraudulently raised were used to pay sales commissions and other "organizational" costs.
The Commission's complaint further alleges that during their fraudulent securities offering, the defendants conducted regular, recorded, sales conference calls where they, directly and indirectly, made numerous misrepresentations, omissions, and half-truths concerning, among other things, their background and experience, the purported success and profitability of the "joint ventures," the safety and risks of the investment, the likelihood of a profitable IPO, and the allocation of funds earned by the "joint ventures."
The complaint alleges that McNaul, Lucas, Krause, Nunns, Kilgariff, Tallman, Hembree, Leonard, Mid Western, and DuBoise violated Sections 5(a), 5(c) and 17(a) or the Securities Act of 1933 (Securities Act), and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. The complaint also alleges that Leonard, DuBoise, and Mid Western violated Section 15(a) of the Exchange Act. The complaint seeks preliminary and permanent injunctions, disgorgement together with prejudgment interest, and civil penalties. The complaint alleges that the relief defendants identified above received ill-gotten gains from the defendants' fraudulent conduct. The Commission's complaint sought an asset freeze against certain defendants and relief defendants, and the appointment of a receiver to recover and conserve assets for the benefit of defrauded investors.
Without admitting or denying the allegations set forth in the complaint, all of the defendants except Leonard have consented to the entry of an order permanently enjoining them from engaging in the violations set forth above. Tallman has agreed to an order finding him liable for disgorgement of $110,000, plus prejudgment interest of $9,369.59, and Hembree has agreed to an order finding him liable for disgorgement of $40,000, plus prejudgment interest of $5,535.24. However, payment of all but $20,000 by Tallman, and $10,000 by Hembree, will be waived, and no civil penalties imposed, based on their respective sworn statements of financial condition and other documents. The remaining settling defendants have agreed to defer determination of disgorgement and civil penalties. In addition, defendants McNaul, Lucas, and Kilgariff and all relief defendants except Consumer Information have consented to an immediate asset freeze and to the appointment of a receiver. Separately, the Court entered freeze and receivership orders against Leonard and relief defendant Consumer Information.
The Commission acknowledges the cooperation and assistance of the Office of the Kansas Securities Commissioner, the Securities Commissioner for the State of Colorado, and the California Department of Corporations during this investigation.